Here's What Chow Tai Seng Jewellery's (SZSE:002867) Strong Returns On Capital Mean

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Chow Tai Seng Jewellery (SZSE:002867) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Chow Tai Seng Jewellery is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.26 = CN¥1.6b ÷ (CN¥8.1b - CN¥1.8b) (Based on the trailing twelve months to September 2023).

Therefore, Chow Tai Seng Jewellery has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 5.0% earned by companies in a similar industry.

Check out our latest analysis for Chow Tai Seng Jewellery

In the above chart we have measured Chow Tai Seng Jewellery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chow Tai Seng Jewellery .

What Can We Tell From Chow Tai Seng Jewellery's ROCE Trend?

It's hard not to be impressed by Chow Tai Seng Jewellery's returns on capital. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 67% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 56% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know about the risks facing Chow Tai Seng Jewellery, we've discovered 1 warning sign that you should be aware of.

Chow Tai Seng Jewellery is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.